Can Restoration Hardware be different this time?

NEW YORK (MarketWatch) — After resurfacing as a public company, Restoration Hardware Holdings Inc. surged 30% on its first trading day on Friday. The big question is what’s different

For one, the retailer of luxury furniture and home-furnishings products
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after going private through a 2008 management-led buyout with private-equity firm Catterton Management, said it’s returned to profit of $20.6 million earlier this year following at least two years of losses.

From fiscal 2009 to fiscal 2011, revenue rose 53% to $958.1 million, with its adjusted profit margin increasing by 5.5 percentage points to 8.4% over the same period.

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Restoration Hardware said it’s also posted 10 consecutive quarters of double-digit net revenue growth through the quarter ended July 28 even as it lowered its store count to 73 from 95 the past two and a half years. The Corte Madera, Calif.-based retailer also forecast its comparable-store sales in the quarter through Sept. 29 jumped about 28%, far above the retail industry average. See related retail October same-store sales.

In its IPO, Restoration Hardware raised $124 million after pricing shares at $24 each. The stock opened at $32.05 on the New York Stock Exchange and closed its first day at $31.10. Also Friday, Williams-Sonoma closed down 2.2%; Ethan Allen Interiors Inc.
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dropped 1.4%.

A big part of Restoration Hardware’s success comes from repositioning its chain from a nostalgic, discovery-items business to a curator of upscale home-furnishings products featured in luxurious living settings, according to the company. It also has assembled a new management team and benefited from a recovery in the housing market, analysts said. The company didn’t return requests for comment on Friday.

“When they went private in 2008, I thought they were going bankrupt,” said BB&T Capital Markets analyst Anthony Chukumba in an interview. “They were a lost company. Their merchandise was haphazard. They didn’t have a real identity. You could find high-end furniture and $20 tchotchkes. They really changed their merchandise assortment, and went for the antique-reproduction type of looks. Now they are hitting on all cylinders.”

Chukumba, who covers Williams-Sonoma, said Restoration Hardware also updated its product quality and raised prices to differentiate itself from rivals including Pottery Barn and Crate & Barrel, among others.

On its website, for instance, several living-room sofa collections come in 56 fabrics each and are priced from $1,310 to about $3,400. In comparison, while Pottery Barn also features sofas costing about $3,000, it also prominently touts sofas $999 and under.

“They’ve done a great job” transforming themselves, Chukumba added, noting that he’s considering picking up the coverage of Restoration Hardware. “You don’t want to be a me-too retailer. The big question is what’s the size of the addressable market. Have they become so niche with the price point and look of merchandise that there’s a limited customer size?”

Targeting customers with household income of more than $200,000, the retailer, which calls its stores “galleries,” said it has “a significant opportunity’ to increase its less than 1% market share in the U.S. housewares and home-furnishings market, which it said had $143 billion in sales in 2010.

Since going private, it has shut stores and remodeled locations to feature products in “lifestyle settings,” and last year opened two “design galleries” in Los Angeles and Houston — 21,500 square-foot stores that are approximately three times the size of its regular shops, and house a more complete assortment.

In the Los Angeles market, for instance, the retailer said it’s increased store demand by more than 90% and direct demand by more than 30% in the first full year of operation of the new design-gallery store.

As of Sept. 29, it had 73 retail stores, including the two “design galleries” and 12 outlets. It said there are about 50 key metropolitan markets where it can open the full-line stores and double its selling square footage in America and Canada over the next seven to 10 years. It also sells through about 26.1 million catalogs and its websites.

To bolster its management ranks, in 2010 Restoration Hardware hired former Guess Inc.
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executive Carlos Alberini as co-chief executive before appointing him as sole CEO in August. Former co-chief Gary Friedman, a former Williams-Sonoma and Gap Inc.
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executive, quit that position amid probe into his alleged relationship with a company employee. Friedman serves as the company’s creator and curator on an advisory basis.

“Carlos is an operator and has a strong track record,” Chukumba commented. “Gary is a merchant. It’s a good partnership; it’s been successful. My wife loves their furniture. It looks like the housing-market turnaround could [also] become a medium to long-term tailwind for them.”

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